Use of Proceeds Collateral Fees
Construction Financing Ineligible Businesses Other Guidelines
To provide existing, viable small businesses with long-term, below market rate financing for the acquisition of land and/or buildings, machinery and equipment, and construction and renovation which results in job creation.
THE PRINCE GEORGE'S COUNTY FINANCIAL SERVICES CORPORATION (FSC)
The FSC is a private non-profit corporation providing financial assistance to businesses in Prince George’s County. The FSC is authorized to sell debentures with SBA guarantees for up to 40% of a project.
The FSC determines the ability of a small business to secure and repay loan proceeds. Only credit-worthy firms are eligible for assistance under the 504 program.
Up to 40% of eligible project cost, with a maximum $750,000 debenture. A $1 million maximum debenture is allowed for selected projects involving productivity improvement, export activities and minority businesses.
The size of the total project is unlimited. On average, a for-profit business is seeking $300,000 - $2 million in financing for owner-occupied space. The typical loan structure involves a participating lender that provides 50% of project costs, the FSC which provides 40%, and the business who injects 10%.
Acquisition of fixed assets including:
- Purchase of land
- Purchase or construction of a building
- Modernization, renovation, restoration, including leasehold improvements
- Purchase of machinery ∓ equipment with a minimum useful life of 10 years
- 10% contingency on construction projects
- Related soft costs such as appraisals,environmental reports, professional fees (accountants, engineers, architects) and interest during construction.
Market rates determined at sale of participation in pool of U.S. government-guaranteed securities plus approximately .725% in servicing fees for the 504 portion (40% of project) and fixed for the term of the SBA/FSC loan. The loan also includes a fee-- 0.875 percent per year of the outstanding balance which covers the SBA's cost. Rule of thumb: 10-year Treasury rates plus 170 basis points.
Rates on private lending portion of project are market rates--fixed or floating--negotiated between the lender and the borrower.
Maturities of 10 or 20 years on 504 debentures, depending on the useful life of assets and the terms of participating private lender
Minimum of 10 years required from the private lender on real estate financing, 7 years on machinery and equipment
Second mortgage and/or lien on assets purchased with proceeds of the 504 loan
Personal guarantees of the principals (ownership of 20% or more) are required.
The small business provides at least 10% of the project costs as equity or subordinated debt. If the small business concern has been in operation for a period of 2 years or less, the 504 borrower will provide at least 15 percent of the eligible project costs. If the project being financed involves a limited or single-purpose building or structure, the 504 borrower will provide at least 15 percent of the eligible project costs.
- 50% first mortgage from private lender
- 40% second mortgage from the FSC (100% SBA-guaranteed debenture)
- 10% equity
Monthly, level-debt installments of the FSC/SBA portion with payments automatically withdrawn from a designated account on the first of each month
One-time Fees are generally paid by the borrower at the time of the debenture sale
FSC's Commitment Fee
1.5% of the portion of the project financed by the FSC, paid with proceeds of debenture loan sale at the time of that sale.
Underwriting Fee
1/2 of one percent of the face amount of each debenture for a 20-year debenture (3/8 of one percent for a 10-year debenture). The Underwriters provide cost-effective advice as to the timing and pricing of offerings, to pool and underwrite 504 debentures, distribute certificates, build and maintain an active secondary market, provide financial advisory services, and develop and introduce innovative forms of securities offerings as opportunities develop.
Funding Fee
The funding fee is 1/4 of 1% of the Net Debenture Proceeds and covers other costs associated with selling 504 debentures. These costs include printing of Offering Circulars and other documents required for public sales of securities, printing of Certificate stock, the costs associated with the Trustee, Fiscal Agent costs, legal costs, and the cost of transferring 505 Certificates.
Reserve Account
The SBA requires a non-refundable reserve deposit , which is 1/2 of 1% of the Net Debenture Proceeds. This is not an escrow account for the small business. In effect, this charge covers the SBA's costs of the SBA504 program, especially the SBA's 100% guarantee of the debenture.
Participation Fee
The SBA requires a one-time fee equal to one-half of one percent of the principal amount of the senior mortgage associated with this 504 loan. The payment is submitted in the form of a certified check or a guaranteed funds check which shall be sent to the Central Servicing Agent by the FSC along with other documentation related to this loan.
Fees that are built into the effective rate of the loan are:
- Borrower Guaranty Fee: an ongoing guaranty fee equal to 7/8th of 1 percent per annum of the principal balance as calculated at five-year intervals beginning with the first payment. This payment is made until the loan is terminated and is included with the payment made each month to the Central Servicing Agent.
- FSC's Servicing Fee: 5/8 of one percent on the unpaid debenture balance. This includes the Development Company Fee-- an ongoing guaranty fee on a monthly basis equal to one-eighth of one percent per annum. This fee is calculated on the balance outstanding at five year intervals and is deducted from the servicing fee collected by the servicing agent for the FSC.
- Servicing-Agent Fee: 1/10 of one percent on the unpaid debenture balance (built into the effective rate of the loan). This fee is calculated on the balance outstanding at five year intervals and is deducted from the servicing fee collected by the servicing agent for the FSC.
- Other Costs
Title Insurance
Closing costs for the FSC's loan
Any legal costs incurred by the company
Recording fees
A 504 loan cannot be used for construction lending. It represents a permanent take-out of the project costs after construction is completed. A regulated lending institution provides interim financing for construction.
- Must be a for-profit corporation, partnership or proprietorship
- Net worth of business not to exceed $6 million. Average net profits after tax not to exceed $2 million (averaged over the last two years)
- An eligible small business is also one whose owners (20% or more) do not have the personal resources to finance the project.
- For projects of $250,000 or less, owners must inject personal liquid assets in excess of two times the total financing package. For projects from $250,000 to $500,000, it's the excess of 1.5 times the total financing package. For projects above $500,000, it's any liquid assets above the total financing package.
At least one (1) job created or retained for every $35,000 of the 504 debenture funds.
Include:
- Passive investment corporations that do not actively use or occupy the assets
- Not-for-profit corporations
- Life insurance companies
- Lending institutions
- Gambling concerns
- Businesses engaged in political or lobbying activities
- Businesses engaged in teaching or counseling religious beliefs
- Businesses that have previously defaulted on a federal loan or whose owner has been indicted for a felony, is on parole or probation
- Working capital, including inventory
- Debt consolidation/refinancing
- Moving costs
- The small business must occupy at least 51% of the building being purchased or renovated immediately upon acquisition and/or completion of renovations.
- Projections should indicate that the small business will occupy additional space within the structure.
- If constructing a new building, the small business must occupy at least 67% of the space upon completion of construction and may lease out the remaining 33%. However, projections should indicate that the business will need that leased space in the near future (for example, years 3 to 10).
- The small business may form an entity-- limited liability corporation, partnership or trust-- to acquire the assets and lease them to the operating company. In that case:
- both that passive entity and the operating company must meet SBA 504 size standards (net worth and profits);
- the operating company will guarantee the loan; and any individual owning 20% or more of both the operating business and the passive entity will guarantee the loan.
An interested business should:
- Prepare a summary of estimates of project cost and assemble financial statements for the last three (3) years.
- Discuss first mortgage and/or construction financing with a bank or other lending institution
